Ever since its inception in 1900 the 8th section of the 2nd book of the German Civil Code (BGB – “Bürgerliches Gesetzbuch”) has contained provisions applicable to certain types of contracts (e.g. for sales, services, loans, rent, etc.). Oddly enough, until today, a major area of the economy – construction – was not subjected to such specialized codification. Instead, construction contracts were governed by laws applicable to general works and services (“Werkvertrag”). Since general rules covering the diverse services of, for example, hairdressers, artisans, craftsmen and construction companies alike cannot adequately cater for each of these contracts, there was obviously room for improvement. In practice the gaps resulting from the fact that the Civil Code did not deal with all relevant issues pertaining to construction contracts were filled by using standard forms of construction contracts, the most important of which is the so call VOB/B, which provided additional clauses in addition to the more general rules of the BGB.
In light of this, the Federal Parliament decided that as of January 1 2018 the BGB will be amended by the addition of Sec. 650a to 650o BGB, expressly governing construction contracts for the first time.
The most important changes are as follows:
- The law provides a mechanism to deal with adjustments of a construction contract to align with the employer´s changed preferences or changes in circumstances (e.g. unexpected ground conditions) during the construction phase. Pursuant to Sec. 650b BGB in these cases the parties should enter into a formal negotiation period lasting up to 30 days. If the parties do not reach an agreement in this period, the employer is empowered by Sec. 650b para. 2 BGB to direct the – in his view necessary – modifications of the works provided they do not cause undue hardship to the contractor. This rule is designed to prevent costly delays caused by a lack of agreement
- The employer´s rights pursuant to Sec. 650b para. 2 BGB are counterbalanced by Sec. 650c BGB, which grants the contractor the right to ask for adjustment of the agreed remuneration. Interestingly, the new Act offers a choice on how to calculate the new price. According to para. 1 the calculation has to be based on the actual additional costs incurred due to the modification. Para. 2, however, allows the contractor to base the additional price on his calculation of the initial contract price instead (i.e. extrapolate the additional price from the pricing of similar works and services under the initial contract). If the contractor chooses to apply this 2nd method it is presumed by law that the resulting prices are identical with prices calculated on the basis of the actual costs incurred. This in turn means that the employer has the chance to prove the opposite, in which case the actual costs have to be paid
- The newly added Sec. 650m BGB allows a contractor to demand interim payments from the employer for works and services already provided before the construction project is finished. Pursuant to Sec. 650m BGB, payment of up to a maximum of 90 % of the total remuneration owed can be exacted this way
- A new provision which will lead to many disputes is provided by Sec. 650c para. 3 BGB. If in case of modifications the parties do not agree on a revised price, the employer is entitled to invoice 80% of the price offered by him for the modification works unless a court has been asked to determine the revised price. It will be interesting to learn how the courts will deal with cases in which the employer's offer is plainly too high
- Finally, Sec. 650r BGB covers a traditionally difficult situation involving the legal handling of design contracts with architects. The problem lies in the lack of foreseeability from the employer's perspective (e.g. What can be built? What will it cost?). According to Sec. 650p para. 2 BGB an architect has to submit documentation detailing preliminary planning and associated foreseeable costs. Upon receiving these documents, the employer is granted a two-week period under Sec. 650r BGB to decide whether he wants to continue the project or terminate the contract. If he chooses to terminate the agreement, the architect is only entitled to a fee covering services rendered and not – as was arguably the case up to now – damages resulting from undue termination.
Even if not all the rules that are to enter into force can be smoothly put into practice, these will be further refined in due course. All in all, for contractors, employers and their respective lawyers, January 1 2018 is a day to look forward to.